Part a - Introduction to Financial Accounitng
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Symbiosis Institute of Telecom Management
ACCOUNTING
CONCEPTS
A.V.Chirputkar, Faculty - Finance, SITM.
M.Com. F.C.A. M.B.F. (ICAI), C.I.S.A. (USA)
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INTRODUCTION
Accounting is;
An Information System :Accounting System shouldgenerate information to meet the requirements of users
i.e. Internal management & Outsiders.Language of business
Useful to personal and business life
Social Science
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Types of Business Entities
Corporate
Non – Corporate
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Definition
Definition by American Institute of CPA:
“Accounting is an art of recording, classifying & summarizing in asignificant manner & in terms of money, transactions & eventswhich are , in part at least, of a financial character & interpreting
the results thereof.”
Definition by American Accounting Association:
“the process of identifying, measuring & communicatinginformation to permit judgment & decisions by the users of
accounts.”
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Functions of Accounting
Recording
Classifying
Summarising
Deals with financial transactions
Analysis & Interpretation
Communication
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Users of Accounts & their Information Needs
Internal Management
Investors
Employees
Lenders, Suppliers & other creditors
Customers
Government
Public at large
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Objectives of Accounting
To keep systematic records
To protect business properties
To ascertain operational profit / loss
To ascertain financial position
To facilitate in decision making
others
• To comply with law
• Disclosure to stakeholders
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Meaning & Scope
There are four sub-parts of accounting;
Book keeping;
Financial Accounting;
Management Accounting;
Social Responsibility Accounting
( also other parts like Inflation Accounting etc)
(Book keeping is different from Accounting, Accounting relates to
other subjects like economics, law, statistics etc.)
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Accounting Elements
Assets – Balance Sheet
Liabilities – Balance Sheet
Equity – Balance Sheet
( The Balance Sheet gives you a financial position)
Income – Profit & Loss Account
Expenses – Profit & Loss Account
( The profit & loss account gives you profit / loss)
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Accounting Procedure
We follow double entry system of Accounting developed in 15th century in Italy by Luca Pascioli
The basic accounting equation is;
Equity + Liabilities = Assets The entire accounting is based on three fundamental rules of debit
and credit. Every transaction has two aspects which can berecorded with the help of these rules.
Three types of Accounts – Personal, Real, Nominal
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Accounting Basics
Money has two aspects – receipt and payment i.e.inflows (credit) and outflows (debit). The Receiptindicates Income and Liabilities and outflow indicatesExpenses and Assets.
Income and Expenses are called as nominal accounts.Income an inflow so credit, liabilities an inflow hence acredit and other persons who give credit like supplier;
For inflow credit rule applies - Credit all income and
gains, credit the giver and credit what goes out.
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Accounting Basics
For an outflow, debit rule applies. Debit all expensesand losses, debit what comes in – after you spent onasset and debit the receiver.
Rule for Nominal Account – Debit all expenses andlosses and credit all incomes and gains.
Rule for Real Account – Debit what comes in and creditwhat goes out.
Rule for personal Account – Debit the receiver andcredit the giver.
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Accounting Structure
Structure:
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Business Entity
Financial Objectives
Profit Maximisation Wealth Maximisation
Financial Statements
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Accounting Structure
Structure
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Financial Statements
Profit & Loss Account
BalanceSheet
Cash FlowStatement
Income &Expenses Assets & Liabilities
Cash inflow &
Cash outflow
Types of Accounts
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Accounting Structure
Structure
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Types of Accounts
Nominal Accounts Real Accounts Personal Accounts
Profit & Loss Account Balance Sheet
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Rules of Debit & Credit
Increase in Asset – Debit
Decrease in Asset – Credit
Increase in Liability/ Capital – Credit
Decrease in Liability / Capital – Debit
Expenses / Losses – Debit
Income / Gains - Credit
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Accounting Principles
Meaning & Importance of Accounting Principles
GAAP – Generally Accepted Accounting Principles
Accounting Principles consists of
Accounting Concepts &
Accounting Conventions
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Accounting Concepts
Separate Entity Concept
Going Concern Concept
Money Measurement Concept
Cost Concept
Dual Aspect Concept
Accounting Period Concept
Matching concept
Realisation concept
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Accounting Conventions
Convention of Conservatism
Full Disclosure
Consistency
Materiality
(Reliability and Objectivity)
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Fundamental Accounting Assumptions
There are three fundamental assumptions;
Going Concern
Consistency
Accrual
Separate disclosure is required if fundamentalaccounting assumptions are not followed.
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Accounting Policies
It includes basic principles, conventions, rules inpreparing financial statements. The managementshould select a policy which suits an organisation. Thefollowing factors should be considered while selectingan appropriate accounting policy and preparing afinancial statement;
Prudence, Substance over form and Materiality.
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Four Phases in Accounting Process
Journalising of transactions & events;
Ledger posting & balancing;
Preparation of Trial balance;
Preparation of Final Accounts.
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Legal Aspect of Financial Statements
In India, every company presents its financial statement in the formand contents prescribed u/s 211 of the Companies Act, 1956.(Refer to Companies Bill 2009 – Section 117)
The form and content requirement is given in Sch. VI to the
Companies Act, 1956.
For Insurance Company – Insurance Act, 1938, General InsuranceBusiness (nationalisation ) Act, 197 and IRDA Act 1999.
Other legal provisions shall also be considered.
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Nature of Financial Statement
It is a statement of recorded facts.
Use of Accounting conventions, principles.
Application of Accounting assumptions.
Personal judgment.
Applying Accounting Standards/(IFRS) and guidancenotes.
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Limitations of Financial Statement
These are interim reports (Periodicity convention)
Requires personal judgment in preparation
It considers only financial factors
Not absolutely final and accurate
Window dressing
It is prepared focusing shareholders
Existence of different principles, methods like depreciation,
valuation etc.
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Recent Trends in Presentation of FinancialStatements
Summarised Balance Sheet and Profit & Loss Account – Vertical Form
Cashflow statement
Disclosure of Accounting Policies
Summarised highlights of financial information
Management discussion and analysis
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Different types of Reports accompanied
Risk Management report
Corporate Governance report
Shareholder information
Additional information
Selected historical data
Human resource and Brand Valuation
Environment, health and safety reports
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Developments
Role of Computerisation;
Changes in Legal provisions;
Introduction of IFRS
Introduction of XBRL
Globalisation & Liberlisation
Financial Reporting Systems by Companies
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